Damper for private oil explorers
Govt decides to retain higher profit share
In what is likely to impact investment decisions of oil and gas companies in the exploration and production segment, such as Reliance Industries (RIL) and Vedanta Cairn, the Ministry of Petroleum and Natural Gas is insisting on a new clause in the work programme for 2018-19 that protects its profit share.
If the companies invest more, they are allowed a higher cost deduction, as in a laid-down formula. This reduces the government’s share of profit petroleum. The new clause says the government’s share, in such a case, should be retained at the earlier level.
Profit petroleum is the revenue that remains after provisioning of costs.
According to a source in the know, the change was conveyed to private companies through the Directorate General of Hydrocarbons, when their budget and work programmes for the current financial year came up for approval. “Cost recovery in respect of the proposed work programme and budget will be as per the provisions of the production sharing contract (PSC). The investment multiple (IM) at the end of year 2018-19 shall not be reduced consequent to implementation of the work programme and budget,” goes the new clause.
A person closely associated with PSCs said the new condition amounted to the ministry putting a cap on the share of oil and gas companies in profit petroleum.
New condition amounts to the ministry putting a cap on the share of oil and gas firms in profit petroleum
IM is the ratio of total net income to total investment made by a contractor. A lower IM means a lower government share of profit petroleum and a higher one means a higher government share. Over the years, as companies further invest in a field, the IM ratio decreases and the government’s share goes down. This is also designed to encourage companies to keep investing in fields and make discoveries, thus enhancing development and production.
For instance, in the PSC for Vedanta Cairn’s Barmer field, the government had 40 per cent of the profit petroleum share; the private company and its 30 per cent partner, Oil and Natural Gas Corporation, had a 60 per cent share. This share for the government would have fallen to 30 per cent in the current year. According to the PSC, profit petroleum is shared with the government in accordance with the IM value at the end of the previous year.
The management committees for each of the blocks that are held by private companies approve a budget for the work programme every year. The minutes of the meeting are circulated, signifying approval of the exploration and development costs.
Another fallout of the new clause is that the Minimum Work Programmes (MWPs) have not been finalised, denying the companies the needed customs duty exemption on equipment imported by them. One private company had placed orders worth $1.6 billion (~105 bn) for work during this financial year.
Since both RIL and Vedanta Cairn had planned to increase their capital investment this year, the new directive is likely to affect them. “The government is tweaking the basic structure of the PSC but we have no option but to invest what was committed,” said an executive in one of the affected companies. He added there had been repeated violations of contract sanctity by the government, leading to a mere 2 per cent share of the oil and gas sector in total foreign direct investment inflow over the past two-odd decades.